Published: October 01, 2008
The National Payments Plan (NPP) was published earlier this year by the UK Payments Council. The document has been promoted as the first step towards agreeing the future development of the UK payment industry. Indeed, the Plan is a welcome movement towards more efficient and dynamic payment services in the UK. However, at a time when corporates are facing pressure to comply with many pan-European harmonisation initiatives such as the Single Euro Payments Area (SEPA) and the Payment Services Directive (PSD), it is not immediately clear to treasurers how the UK-centric NPP will work with other impending regulations and shape tomorrow’s European payment landscape.
There are still many areas of the NPP which are yet to be agreed and the UK Payments Council has called for an extended period of consultation on several elements in the Plan. Specifically, there is a great deal of work still to be done to address the shifts in the wider European payment landscape and how these will impact the UK market, which is of particular relevance to treasurers and those responsible for compliance and risk management. At present there are few connections between the NPP and the Payment Services Directive. Indeed, the PSD was not correlated with the NPP at its inception, resulting in a lack of clarity in the NPP about the Directive’s influence on the UK market.
The demise of the cheque
In recent years, there has been a reluctance to invest in cheque processing efficiency. As a result, cheques have become more costly to process and have risen up the fraud risk scale. Large retailers have already ceased to accept cheques, signalling the long-predicted decline of this payment method and continued migration towards electronic payments. This evolution is advocated by the National Payments Plan. The declining acceptance of the cheque is a positive step for UK businesses due to the expensive in-bound and out-bound processing cost, which can, in some cases, exceed the value of the cheque. Moreover, according to a recent survey by Experian Payments, which questioned the utilities, telecoms and insurance industries, it is also the payment channel that suffers the most fraud. Forty-nine per cent of all fraud suffered by these sectors occurs with cheque payments. To this end, the Plan will help to guide corporates towards migrating their customers onto more efficient and secure payment methods, such as Direct Debit.
One challenge, which must be considered in relation to cheques, is that some companies rely on cheques as an authentication mechanism. Dual or multiple signatories is an ingrained business process for some organisations and if they are forced to use other channels, banks must take care to facilitate the equivalent internal business security benefits.
The NPP currently predicts a 2018 end-date for cheque processing.
Direct Debits
Despite the November 2009 deadline for PSD compliance, the Direct Debit requirements affecting UK corporates as outlined in the European-wide document have not yet been taken into account in the NPP. For example, it is not clear on what legal basis Direct Debits will operate between euros and sterling, resulting in confusion for treasurers over areas such as refund laws. If a Direct Debit processed from the UK to an EU country requires a refund, it is not clear to the consumer whether this will have to adhere to UK rights and obligations or wider European regulations on when money must be returned to the customer.
The UK Payments Council must address this omission to clear up any doubt and ensure they are complying with all relevant laws. Due to the strong legal basis of the PSD, it must be assumed at this stage that the NPP will be overruled by the national implementations of the PSD and therefore it is recommended that treasurers take steps towards PSD compliance in this area.
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One aspect of Direct Debits that has not been considered in the future UK payment framework is that it is currently necessary to provide the same information to receive a payment as to make one - a sort code and account number. It has been suggested to the UK Payments Council that, to help engage consumers with the benefits of Direct Debits, it would be beneficial to use different account numbers for receiving payments and making payments. While this is not currently proposed in the Plan, if implemented, it would ensure that records used to process payments to beneficiaries could not then be used to perpetrate Direct Debit payment fraud against them, making the service more appealing through improved security.
The Payments Council believes that the National Payments Plan should be developed on the assumption that cash will remain a major payment method for the foreseeable future. In the consultation, almost all respondents agreed that the NPP should be based this proposal, although a number thought that this should not preclude the Plan supporting migration from cash to what they regarded as more secure and cost-effective payment methods.
The Plan will help guide corporates towards migrating their customers onto more efficient and secure payment methods such as Direct Debit.
While cash is undoubtedly a major payment method, its importance is related to the volume of transactions - not to the value. Indeed, I believe the current evolution of low-value payment types such as contactless and mobile payments will lead to a decline in cash usage similar to that forecast for cheques. This is likely to benefit merchants and banks due to the reduction in the cost of cash handling and reconciliation. Although consumers still enjoy the convenience of cash payments, as more merchants move to support contactless mechanisms, cash will become a reducing percentage by volume of all payments.
As the NPP is revised and updated, there must be a decreasing focus on cash to benefit corporates, coupled with an increase in the efficiency of cash payments. In the meantime, treasurers must embrace emerging payment methods, such as mobile and the growing use of the Internet to manage bills and Direct Debits, and ensure the back office processes to support and secure these payments are available. As customers are encouraged to adopt various new modes of electronic payment, corporates will benefit from faster, information-rich and more cost-efficient payments.
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Account number formats
During the consultation for the Plan, several respondents commented on the pressing need to improve the accuracy and delivery of payment reference information. Although the feedback from the financial community was that this is an area that is in urgent need of review, the UK Payments Council has made no recommendations in the Plan regarding the accuracy of reference information other than to commit to an assessment, by June 2009, of the costs and benefits of introducing a minimum standard. In fact, across Europe, the UK is one of the worst offenders in terms of standardised account numbers. In the UK we not only use sort-code and account number to refer to a credit account, but also, in the cases of some building society accounts and credit unions, an account reference or roll number which cannot be represented is the closest we have to an international standard - the IBAN.
As customers are encouraged to adopt various new modes of electronic payment, corporates will benefit from faster, information-rich and more cost-efficient payments.
This is another area of the NPP which lacks co-ordination with the Payment Services Directive. In the Directive, for a payment to be properly executed, payment service providers must provide the user with various items of information, including a unique identifier. The PSD states this can be a PIN number but this is incorrect. A PIN is not a legitimate unique identifier and therefore the NPP is promoting consultations to address this issue. However, it is unlikely that these will be completed before the PSD comes into effect in the UK. The Payments Council’s decision to delay introducing a minimum standard until June 2009 will leave treasurers little time to prepare and implement complex account referencing information by the PSD’s November 2009 deadline. Such discrepancies regarding how payments are identified are a fundamental challenge to treasurers and it is, therefore, vital that they have greater clarity.
One way to achieve this is to ensure that the data used to direct the payment is both correct and in a standard form when the transaction is initiated. This avoids costly and inconvenient payment failures, which will not only benefit the bottom line but also improve consumer confidence in electronic credits, including UK Faster Payments.
e-Invoicing
The National Payments Plan acknowledges that e-invoicing is already a reality and many corporate treasury departments have solutions in place. Rather than manage the uptake of this payment-related service, therefore, the UK Payments Council should cover in the NPP the pressing need to reduce the fraud risks associated with e-invoicing, for instance the need to ensure that an e-invoice has originated from the correct biller and that it relates to a correct account. This issue is not addressed in the NPP but it is a growing challenge facing treasurers that should be incorporated into future revisions of the plan.
In 2006, the Euro Banking Association established a working group on e-invoicing to define opportunities for banks and businesses in Europe. Owing to the important role that e-invoicing will play in the future payments landscape, it will be beneficial to all UK business if the Payments Council makes good on its promise to collaborate on this initiative.
Although the NPP sets out a stall for the future of the UK payment landscape, there is still much to be done to guide treasurers towards improved standards for efficiency and security of payments. Despite the entire European payment landscape being in flux at the moment, there is currently not enough consideration for the EU’s Payment Services Directive and its impact on the UK market within the current version of the NPP.
The Payments Council must not delay further in its final recommendations. Treasurers need both guidance and time to facilitate harmonisation with the rest of the European payment industry and to achieve consistent application of the Payment Services Directive.
Furthermore, the UK Payments Council should respond to any further consultations on SEPA initiatives run by the European Payments Council, the European Central Bank and the European Commission. It is important that the UK position is clearly articulated and that any necessary developments are foreseen and scheduled into the National Payments Plan. With such a wealth of payment regulation being implemented, this is a tough time for UK treasurers. However, with prudence and planning, there is no reason why the end result cannot be a more harmonised and streamlined payment industry in the UK and beyond.
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